Pandora Media back from brink of bankruptcy

ONLINE RADIO

Benny Evangelista, Chronicle Staff Writer

Published
4:00 am PDT, Saturday, August 8, 2009

Tim Westergren, the founder of the internet radio company Pandora, sits among boxes filled with CDs that make up Pandora's Music Genome Project at their offices in Oakland, Calif., on Wednesday, July 29, 2009.

Tim Westergren, the founder of the internet radio company Pandora, sits among boxes filled with CDs that make up Pandora's Music Genome Project at their offices in Oakland, Calif., on Wednesday, July 29, 2009.

Photo: Laura Morton, Special To The Chronicle

Photo: Laura Morton, Special To The Chronicle

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Tim Westergren, the founder of the internet radio company Pandora, sits among boxes filled with CDs that make up Pandora's Music Genome Project at their offices in Oakland, Calif., on Wednesday, July 29, 2009.

Tim Westergren, the founder of the internet radio company Pandora, sits among boxes filled with CDs that make up Pandora's Music Genome Project at their offices in Oakland, Calif., on Wednesday, July 29, 2009.

Photo: Laura Morton, Special To The Chronicle

Pandora Media back from brink of bankruptcy

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For years, Internet radio company Pandora Media Inc. teetered on the edge of bankruptcy.

Not that the online music streaming service didn't have listeners - the Oakland firm has 31 million members and is adding up to 65,000 more each day.

But a long dispute over online music royalty payments threatened the viability of the 9-year-old company. Then in July, Pandora and other Webcasters reached an agreement with the record industry over rates.

"If the rates weren't changed, we were done, because they were way too high," said founder and Chief Strategy Officer Tim Westergren.

And thanks to its rapidly growing presence on mobile devices like the iPhone, Pandora officials believe the company is finally on the road to profitability.

"The iPhone single-handedly kicked off that phenomenon," Westergren said. "It changed the way consumers think about what Internet radio is. You're no longer limited to thinking it's just a computer radio."

Pandora provides personalized radio - members create their own stations by selecting songs, artists or genres, and the service selects songs that match. Members can adjust the playlist by voting the songs up or down and buy tracks through iTunes or Amazon.com, but they can't pick a specific song to stream on demand.

More than 750,000 songs have been cataloged over the past decade in Pandora's Music Genome Project, in which musicians analyze and enter up to 400 details for each tune, including melody, harmony, rhythm, vocals and lyrics.

Westergren said about 70 percent of new members use a mobile device, especially the iPhone. Pandora's year-old iPhone application is that device's most popular free music app. And about one-quarter of Pandora's iPhone users listen in their cars.

"Until a year ago, all of our growth was just on the desktop," he said.

The service is free for the first 40 hours per month, and 99 cents covers the remainder of the month. There were howls of protest when Pandora started the fee to help offset the new royalty payments, but only 10 percent listen for more than 40 hours, Westergren said. The company also offers a $3 monthly subscription for service with no advertising.

But ads displayed as the music plays generates the bulk of revenues. The company earned about $18 million in 2008 and expects to double that by the end of this year.

Pandora doesn't advertise itself, relying solely on word of mouth. But analyst Russ Crupnick said Pandora has managed to gain more traction among Internet users than other online music services such as Imeem, Live355.com, AOL Music or Slacker.

"They have more than 20 percent of the Internet population aware of the service and 40 percent of those who are aware use it," said Crupnick, senior entertainment industry analyst for the NPD Group.

However, Crupnick said he still has reservations about Pandora's revenue model because music fans tend to pay attention to the tunes and not the ads.

The field could also be getting more crowded. Spotify, a popular European service, is planning to expand to the United States, while Microsoft is reportedly working on a streaming music service.

But Westergren said Pandora has already weathered tougher times. Pandora Media was born in San Francisco, but moved to Oakland in late 2000. It is one of the few survivors from the Bay Area's digital music boom and bust, which occurred about the same time as the dot-com bust. (Hearst Corp., which publishes The Chronicle, is an investor in Pandora Media.)

Westergren, a Stanford graduate and a pianist, said Pandora survived the early years with a "B to VC" strategy - borrowing to venture capital money - and by maxing out credit cards.

What held the company back was the possibility of having to pay high royalties for songs streamed online.

In 2007, a panel of copyright judges set new rates that Westergren said would have consumed 60 to 70 percent of Pandora's revenues, not leaving enough to provide a sustainable business model. The lingering uncertainty also scared off potential advertisers and employees, he said.

But on July 7, Webcasters and SoundExchange Inc., the nonprofit agency that collects online royalties for record labels and artists, announced a long-term agreement allowing Pandora and others to pay a lower per-song royalty or 25 percent of revenues, whichever is larger.

Pandora received another boost when it closed a new $35 million round of funding led by Greylock Partners.